What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Entergy (NYSE:ETR) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Entergy:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.047 = US$2.6b ÷ (US$62b - US$6.9b) (Based on the trailing twelve months to March 2024).

Thus, Entergy has an ROCE of 4.7%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

In the above chart we have measured Entergy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Entergy .

What Can We Tell From Entergy's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. So we're very much inspired by what we're seeing at Entergy thanks to its ability to profitably reinvest capital.

The Bottom Line On Entergy's ROCE

All in all, it's terrific to see that Entergy is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 21% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Entergy does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Entergy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com